Professor Colin Talbot reflects on an Autumn statement that was really a mini-Budget – and some fine detail that hints at the Chancellor’s ultimate intentions.

Much of the comment on today’s Autumn Statement by Chancellor George Osborne will focus on the specific measures he announced (there were lots) and on the short-term politics of the debate about austerity.  Only a few will notice the longer-term implications buried in some of the detail.

But first, a word about the process. When is an Autumn Statement not an Autumn Statement? When it’s really a Budget crossed with a (very) long-term Spending Review. George Osborne might not like to admit it, but in some respects as Chancellor he’s very like Gordon Brown. Let me explain.

Mr Brown liked to trumpet his aspirations to being long-term and strategic in his thinking. He introduced multi-year Spending Reviews to be, and crucially to be seen to be, more strategic.

Much to the surprise of many, Mr Osborne retained the paraphernalia of Spending Reviews when he took over as Chancellor in 2010 – he even extended their ‘strategicness’ by making his 2010 Spending Review a four-year Plan, rather than a three-year Plan as under Mr Brown.

But Mr Brown found it hard to stick to 3 years – his first four Spending Reviews (1998, 2000, 2002, 2004) took place every two years rather than three. Likewise, Mr Osborne failed to keep to his four-year plan, holding the next Spending review in 2013 rather than 2014.

Spending Reviews – under both governments – still have to be implemented in the annual Budget and both Mr Brown and Mr Osborne couldn’t resist the temptation to make all sorts of ‘tweeks’ to their “firm” multi-year spending plans at every Budget.

But the similarity goes further – in his later years as Chancellor, and then as Prime Minister, Mr Brown insisted on making the Autumn Statement – which ought to be a broad policy statement – into a mini-Budget every year. It got so bad under Labour that Alistair Darling complained that as Chancellor he had to deliver six Budgets in three years.

Mr Osborne clearly thinks that, like Mr Brown before him, the Autumn Statement is an opportunity too good to be confined to broad policy and so he’s loaded it, yet again, with immense amounts of detailed policy changes.

But hidden within this deluge of attempts at headline grabbing announcements, the real long-term strategy of Mr Osborne is pretty clear – he wants to “roll back the frontiers of the state” in a way that even Mrs Thatcher failed to achieve.

This is best shown in the following statement in the OBR’s Economic and Fiscal Outlook which accompanies (and is longer than) the Autumn Statement:

“Our forecast implies that the UK’s budget deficit will have fallen by 11.1 per cent of GDP over the nine years from 2009-10 (around £180 billion in today’s terms). Around 80 per cent of the reduction is accounted for by lower public spending. This will take government consumption of goods and services – a rough proxy for day-to-day spending on public services and administration – to its smallest share of national income at least since 1948, when comparable National Accounts data are first available. The remaining 20 per cent of the drop in borrowing is accounted for by higher receipts, with the majority having taken place by 2012-13, largely as result of rises in the standard rate of VAT.” (para 1.10, page 7).

The crucial bit here has been highlighted – what Mr Osborne plans is a fundamental downsizing of the British state. The OBR has chosen the most dramatic figures, but the ones most usually used – total spending as a proportion of GDP – tell a very similar story.

On this metric their forecast is that total expenditure drops to 38.4% of GDP by 2018-19. The long-term average over the past four decades has been about 43% of GDP (page 159). Many on the Tory right have been calling for public spending to be permanently cut to “US levels” – i.e. about one-third of GDP.

On today’s forecast Chancellor Osborne would be half-way there by 2018 and all the signs are he’d like to keep on going in that direction, although he’s too canny to say so publicly.

But look again at the OBR statement: 80% of the reduction in the deficit has come from cuts to spending (reducing the size of the state) and only 20% from taxes – nearly all of that from the VAT increase. And, crucially, going forward tax increase will play little or no role in deficit reduction.

So cutting public spending isn’t a reaction to the fiscal crisis – it’s a long-term strategy to permanently shrink the state. Maybe not quite back to 1948, but who knows? The graph below illustrates the trend under the Coalition (and previous governments.)

A couple of things to note:

• The slight upward ‘tick’ in spending as a proportion of GDP in 2015 – I wonder what could be happening then?
• Contrary to myth, Labour spending never went above the long term average (42.6% of GDP) until the financial crisis hit, and had in fact levelled off from 2004 onwards.

Total public spending as a percentage of GDP (1971-72 to 2018-19) (Flat line is average)

Sources: PESA 2013 up to 2011-12; OBR forecast 2012-13 to 2018-19.